Personal Finance Rules

Personal finance is a process of understanding the individual financial situation and planning and managing personal financial activities for future.

It helps one understand the earning and expenses, and to budget expenses within the available income. There are 5 main areas of personal finance- income, expenses, savings, investments and protection.

One may come across certain rules that have been framed to guide people in this regard. I’m giving here 5 such interesting rules for you-

1️⃣Rule of 72 (Double Your Money)
2️⃣Rule of 114 (Triple)
3️⃣Rule of 70 (Inflation)
4️⃣4% Withdrawal Rule
5️⃣100 Minus Age Rule

1️⃣Rule of 72
To find out the number of years required to double your money at a given rate of interest, you just divide 72 by applicable interest rate.

For example, if you want to know how long it will take to double your money at 8% interest, divide 72 by 8 and you will get 9 years.

At 6% rate, it will take 12 years, and at 9% rate, it will take 8 years, and so on.

2️⃣Rule of 114
To find out the number of years required to treble your money at a given rate, you have to divide 114 by the applicable interest rate.

For example, if you want to know how long it will take to treble your money at 12% interest, divide 114 by 12 and you will get 9.5 years.

At 6% interest rate, it will take 19 years to treble your money, and so on.

3️⃣Rule of 70
You divide 70 by the current inflation rate to know how fast the value of your investment will get reduced to half its present value.

If the inflation rate continues to be 7%, then the value of your money will get reduced to half in 10 years.

4️⃣4% Withdrawal Rule
The formula is Corpus Required= 25*Annual Expenses

If the expected annual expense is 500,000 then corpus required to retire for financial freedom will be 1.25 crore. So you can withdraw 4% i.e. 5 lac every year for expenses for the next 30 years.

The ideal ratio of investment is considered to be 50% into fixed income and 50% into equity. But it depends how one opts for the ratio.

5️⃣100 Minus Age Rule
This rule is used for asset allocation for investment. You subtract your age from 100 to find out how much of your portfolio should be allocated to equities.

If your age is 30, then 70% may be allocated to equities, while 30% to debt. But if age is 60, the ratio may be 40 and 60 respectively. This is not universal, but with age, it is believed that the risk appetite of a person gets diminished.

There is a concept of ceteris paribus in economics, that means holding other things constant, or all else being equal. It applies here too.

There are other rules also like the above 5, for general guidance, but a call must be taken based on the prevailing situations, e.g. income, inflation, expected expenditure, risk appetite etc.

–Kaushal Kishore